# Chapter six merchandising accounts - Write a 500-1,000-word...

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Write a 500-1,000-word essay describing the operating cycle of a merchandiser. What is Cost ofGoods Sold (COGS), and where is it reported? How is Gross Profit calculated, and what does it represent? E FIFO, LIFO and Weighted-AverageThe operating cycle of a merchandiser is can be extensive with inventory. There are several different ways the process can be achieved with the FIFO, LIFO and weighted-average method.Each method has a different effect on the Cost of Goods (COGS) which in return effects the gross profit. FIFO (First in, First Out) method is taking the oldest inventory and selling that first. Since the oldest inventory is generally the cheapest the cost of goods is usually cheaper in return you have a greater gross profit. For example I have two units on hand at 2 dollars each. I purchase two more units at four dollars each. I then sell three units at six dollars each. I will first deplet me inventory that was on hand first. Which is the two units at two dollars each and I will continue up into my oldest to newest inventory till I fill the order. In the end I will sell two units at two dollars each and one unit at four dollars. Which my total cost of goods is now a total of eight dollars. I sold those three units at six dollars each which mean the total priced paid was eighteen dollars, total revenue. To find my gross profit I take the total revenues and subtract mytotal cost of goods. In this case it would be the eighteen dollars subtracting the COGS, eight dollars which is a total profit of ten dollars. LIFO (Last In, First Out) has the opposite effect on the what inventory is sold as opposed to the FIFO method. The newest inventory gets sold first. The newest inventory was the last inventorypurchased which usually cost more than the oldest inventory. This makes the Cost of goods more and the gross profit less. “LIFO is not permitted under International Financial Reporting Standards (IFRS)”(2014, page 371). GAAP still does allow US companies to use the LIFO method. If GAAP did not allow to LIFO to be used it would have a significant impact on businesses income statements and balance sheets (Nobles, 2014). The weighted-average method is very different from the LIFO and FIFO method. Weighted-average method takes all the inventory on hand and averages out the cost of it.
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